Brazil’s Gold in a Torrential Storm

Brazil, on Saturday, won a gold medal in the Olympics Football event - defeating Germany, only after a long extended tenacious struggle involving penalties after extra time, reminiscent of battles faced by the beleaguered nation. Brazil also won its second gold of Rio 2016 as Thiago Braz won in the men's pole vault contest, in spite of heavy rains. As the world enjoys the Olympics, more than a few in the leadership of the world's largest Latin American economy, will not be in the mood to enjoy the enthralling entertainment – an event costing the government a huge outlay. But perhaps it was worth it after all.

Recent research at the Saïd Business School, in Oxford, which analysed 30 summer and winter games, has claimed that none of the Olympic games ever held, came in within their initial budget and nearly half exceeded targets by more than 100 per cent (The International Olympic Committee (IOC) has dissociated itself from this study). The average cost of holding the games was put at $8.9B, buttressing claims that the $4.8B budget for the Rio games is on the optimistic side ... also perhaps explaining root causes behind many complaints of inadequate arrangements. So why is Brazil, a nation with a 10.9% unemployment, annual GDP decline of – 3.8% and inflation close to 10%, going on this kind of spree?

Luiz Inacio “Lula” da Silva, the President before the somewhat ousted Dilma Rousseff, who helped Brazil win the right to host the elections in 2009, has now been formally accused and is facing obstruction charges on suspicions that he tried to pay a former Petrobras executive to stop him from cooperating with authorities. When the initial hosting decision was made, the economic outlook was much better for Brazil. In 2010 the economy was growing at a phenomenal 7.5%, but a dramatic global economic downturn complicated by a political impeachment process and billion dollar scandal should at least have led to some rethink on going ahead with the games (notorious for its loss-making). Those supporting the hosting argue that there will be gains from tourism and infrastructure investments as well as a boost in market sentiments as capital inflows gradually improve. They may be right, even as a recent study by UBS is projecting that the second half of 2016 in Brazil will show significant fiscal improvements as market optimism picks up with the appointment of acting President Michel Temer. Most Brazilians are not convinced, as polls continue to suggest that the majority do not support the hosting of the games, in the present stormy political and economic climate.

Temer's economic team (the UBS report claims) is said to be bringing Brazil closer to fiscal stability by improving management of its national debt and the tap of welfare spending which some said culminated in Rousseff's failures. The economic situation, worsened by external threats such as the commodities glut and a lingering corruption scandal in the states oil company, Petrobras which further spooked the markets, was not expected to witness improvements till 2017 … making UBS forecasts a possible sign that perhaps the worst will soon be over.

The new acting President Michel Temer was however booed at the Olympics opening ceremony. He is unpopular for moving the government more to the right and appointing an all-white cabinet that does not reflect Brazil's ethnic mix. Only 8% are said to favour Temer in a poll and already 3 members of his cabinet have already been forced to resign following scandalous allegations. The Petrobras scandal has raised suspicions that Temer was involved in an illegal ethanol operation. Electoral authorities in Sao Paulo have also convicted him of involvement in illegal campaign donations which will make him unable to run for office in the next 8 yrs. and more allegations are being heaved at him. Temer still has the support of the fickle congress, many of which are also under investigation, and market participants relieved at the possibility of some relative stability.

Although the IMF has always been positive about Brazil, given its strong Industrial base and other positive factors, it still has a long way to recover its image as an attractive global spot – even as it considers new legislation to make the oil and gas sector more competitive amidst historical leftist inclinations to protectionism.

Most analysts are of the opinion that only far reaching reform will put Brazil back on a sustainable path of economic improvement … as transient positive blips from the excitement and attention during the Olympics and the novelty of a new acting President fades. The political stability required for reform remains elusive.

Dilma Rousseff has shunned the games, refusing to play second fiddle to Temer, who has enough also on his plate to deal with. Dilma Rousseff has yet to be directly accused of anything but may be impeached for breaking budgetary rules to cover short term deficits - to help what many have called an aggressive social spending binge. In all, three present and past presidents presently are at moderate risk of a sojourn in prison.

Many observe that Brazil understands that major fiscal reform is unavoidable and will eventually reclaim its position as one of the few stars amongst emerging market economies – like India. What is less clear is the pace at which its fiscal health can improve and whether expecting any turnaround in 2016 is far-fetched. The best time for the markets to invest is when asset prices are bottoming. Many analysts believe that is already happening and positive investment inflows will soon begin as the markets expect to ride on the potential future gains from an environment that has seen better days. The best news for Brazil is that its war against corruption is a real storm driven by a new nationwide demand for law, order and improved governance. Investors know that the Brazil that emerges after the turmoil will be a much better one.

Eventually the forecast is that Brazil is positioned to win gold again … this time for successfully resisting and defeating demons of corruption ... as the war moves to an extended heated and intense finale. God smiled on Brazil at the Olympics ... indeed, righteousness exalts a nation.